An Unusual Opportunity for Debt Investing

By Travis Johnson, Stock Gumshoe, October 9, 2009

Recent reports indicate that investor enthusiasm for bond mutual funds is continuing to climb — that may well be an indicator of fear, or a prescient move on investors’ parts to avoid another stock downturn, or simply a need for an aging population to protect retirement assets, it’s impossible to know exactly why these trends occur.

But the trend is real — bond fund inflows hit a new record in August, with far more money flowing to bond mutual funds than to stock funds in August (and that trend has continued in September, according to the weekly reports, with money flowing into bond and hybrid stock/bond funds and out of domestic stock funds, though the flow into foreign mutual funds has also gone positive again).

So what does that mean? It means that if you’re like most people, you feel the pull of safety and income, and you feel like you should be putting more money into bonds. Whether or not that’s the right thing to do, most people, unless they completely liquidated their stock holdings and are paralyzed by fear, are probably underexposed to bonds in general, especially folks who are worried about the bond-destroying impact of potential inflation.

I agree with many experts that putting your money into Treasury bonds is extremely worrisome right now, you’re really being paid hardly anything at all to park your money in long term US bonds — barely over 4% for lending money for 30 years to a debt-drunk nation that cannot feasibly repay it without debasing the currency? Doesn’t sound very appealing, even if we do see deflation for a year or two, and even if rampant inflation never takes off as so many folks expect it will.

But I do think there’s a good argument to be made for bonds and for debt investing in general — I fully expect the economy to be very turbulent for a couple years, and I think it’s certainly quite possible for the market to have some more frightening falls, and for many of the stalwart dividend-payers to go on cutting their payouts, as many have done this year. That argues in favor of moving up the credit chain and lending companies money instead of being an equity owner of a company, which means buying corporate bonds and other corporate debt.

In this area, however, I’m nervous about searching for high ...

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